A Post-Mortem on Tomb.Finance and Its Forks
A couple of months ago I was planning to write a post titled “Why I think all Tomb forks will eventually fail?”. However, I am late and even the last standing ones like Grape is off the peg for so long now; so I decided “post-mortem” suits the title much better.
Please don’t take this post as financial advice, these are only my personal opinions on why Tomb failed (lost its peg) and its forks are destined to eventually fail.
What is Tomb?
According to their own description “(Tomb is) The first algorithmic stablecoin on Fantom Opera, pegged to the price of 1 FTM via seigniorage.” This means Tomb is a token that is designed to be equal in value to 1 FTM all the time. And they aimed to achieve this with two main mechanisms: to increase supply (when 1 TOMB > 1 FTM) or decrease it (when 1 TOMB < 1 FTM).
Did Tomb really fail?
I wanted to clarify the term “fail” before I dive deeper. Tomb lost its peg many times and they recovered really well after all of them (except the last one). At one point in time, they achieved $1 billion TVL (total value locked) and even recovered from a hack in which the hacker dumped $TOMB tokens. (The Grim Finance hack)
On nearly all occasions, the Tomb DAO played a crucial role in recovering the peg, you can take a closer look at the transactions from their own documentation page. After the crash of LUNA/UST, many people sold their tokens that contained “algo” in their name and Tomb also got affected drastically by this and lost its peg. It hasn’t recovered since.
However, they released their own chain and CEX. Their ecosystem is growing so it will be wrong to call the project a failure. Throughout this post when I use the word “fail”, I will be using it regarding the value of Tomb.
At the time of writing this article, 1 $TOMB is equal to $0.1746 $FTM. And according to my calculations a total buy of ~5,500,000 $FTM (~1,365,000) is needed to make 1 $TOMB = 1 $FTM again. [1]
How does Tomb work?
Understanding the dynamics and the incentives of the system is crucial for understanding why Tomb failed and why the possible future forks will eventually lose their peg.
There are 3 tokens in the system $TOMB, $TSHARE, and $TBOND.
In short, $TOMB is the main token that is designed to be equal in value to $FTM all the time, $TSHARE is the protocol token, and $TBOND is the bonded version of $TOMB.
$TSHARE is rewarded for incentivizing liquidity. People who staked their $TOMB/$FTM and $TSHARE/$FTM LPs (liquidity tokens) were able to farm $TSHARE under the Tomb ecosystem.
In addition, $TSHARE wasn’t just a useless farm token, $TSHARE stakers were rewarded from the “inflation” of $TOMB. When $TOMB is above peg (traded above 1 $FTM), their boardroom (which is named Masonry) was increasing supply by printing more $TOMB, and those were proportionally distributed to $TSHARE stakers in the Masonry. This part worked without a problem, there were no issues with the inflation phases.
The “deflation” phases were rewarded by $TBOND. When $TOMB is below peg (traded below 1 $FTM), you can mint $TBOND by burning $TOMB. In theory, as this process decreases the supply, the $TOMB price should rise by $TBOND mintings. And when the $TOMB price increases over 1 $FTM, you can redeem your $TBONDs with a reward so when you redeem, you get more than 1 $TOMB for each $TBOND. This approach was one of the reasons why Tomb failed.
The Fault in Design
Although in practice it may not be that easy, in theory, there is nothing wrong with adjusting supply for making a coin pegged to another one. For example, projects like Ampleforth are doing this. However, there was a key fault in Tomb’s design: deflation was never permanent although inflation was permanent all the time.
When $TOMB is above the peg the boardroom prints more $TOMB and the amount in circulation increases. When $TOMB loses its peg and people start minting $TBONDS the supply temporarily decreases. And in that scenario, there are two possibilities.
First, no outside buys happen and the $TOMB price never goes above peg again. (One important thing to note here is that burning $TOMB doesn’t increase the price on its own, new buys should happen for the price to rise.)This is the worst-case scenario and the case we call a failure.
Second, people buy more $TOMB, and its price increases above the peg, the good scenario. And when this happens the people who bonded their $TOMB would naturally want to get their $TOMB back with the incentive. And this again increases the $TOMB in circulation again. There are also psychological factors such as people who saw that $TOMB can go below peg would be more likely to sell their $TOMB. However, even without the psychology of investors, this system is not sustainable without more and more money entering the system all the time. Because after the peg is lost for the first time it will get more and more likely (easy) for the peg to be lost again.
How Can This Be Improved?
I don’t have the specific answer to how to make a sustainable TOMB fork, if I had, I would be building one :)
But in theory, if a protocol can be developed that incentivizes people in any way (and this is the hard part) to actually burn their $TOMB instead of bond it, then I believe a sustainable TOMB fork that doesn’t require more and more cash inflow can be developed.
References
[1] https://docs.google.com/spreadsheets/d/16A41ke10ABgiLvxKZrilt-AhVJPfMWj3JoqC1_CQN04/edit?usp=sharing
